Why does an increase in interest rates cause stock prices to fall? Give two reasons.

Expert Solution

When interest rates go up, the supply of money reduces from the market, which in reduces consumer and business spending. Reduced spending leads to reduced profits. Reduced profits have impact on the stock price of the stock.
As interest rates go up, people tend to invest more in fixed income instruments instead of investing in stocks which is a risky investment. Therefore, stock prices fall as people prefer not to invest in stocks when interest rates have risen.

jeff jeffy answered 2 years ago

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